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Incorporation remains most tax-efficient method for small firms, says Richard Tyler
The Chancellor's decision to raise 1.2bn by hitting small companies with a 16pc tax rise still leaves incorporation as the most tax-efficient way to set up in business, analysis for Your Business has established.
Accountants Smith & Williamson have crunched the numbers and discovered that despite the rise in corporation tax from 19pc to 22pc over the next three years, business owners still pay less tax if they operate as a company.
Online Self Assessment Filing Hits New Record
2,895,482 people chose to file their 2005/6 self assessment tax returns online, an increase of 40% over the previous year.
HMRC Crackdown on Employers
HMRC launched a new radio campaign in February urging employees who suspect their employer isn't paying over their tax and NI for them to ring the Tax Evasion Hotline (0800 788 887).
The campaign features a restaurant owner telling his waitress that there is nothing she can do about being paid cash-in-hand. Employees may lose out on benefits where their NI contributions are not paid. Click here to see link.
HMRC Targeting Professional Firms?
Smith & Williamson reports that HMRC are currently undertaking an enquiry into the 2004 accounts of a firm of solicitors. The Inspector's original enquiry letter included the following:
I would like to examine the relationships between the partners (including wives/civil partners and families) and the partnership. My review will include the provision of assets, services or facilities of any kind and the meeting of partners personal liabilities by the partnership. Please provide, for each partner and family, details of all such provision including payments in cash or in kind made for services rendered to the partnership, whether or not subjected to PAYE. In each case, I would like to know how the value of the provision was calculated and how this was reflected in the partnership accounts. Where details are already provided in the tax computations, please show clearly how the private adjustments etc have been arrived at.
Smith & Williamson's reply included a note to the effect that wages of 3,000 each were paid to the wives of five of the partners. The Inspector has subsequently written as follows: I will probably need some further information in respect of the payments to the partners wives. Currently the approach to querying these payments is being reviewed to ensure a consistent approach.
The Inspector's response suggests that there may be a coordinated review taking place into the tax affairs of professional partnerships and in particular with regard to wages to spouses. (http://www.smith.williamson.co.uk)
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VAT: Fuel Scale Charge - New CO2 Basis
Changes to the VAT fuel scale charge come in to effect on 1 May 2007. Firms must use the new scales from the start of their first accounting period beginning on or after this date.
The existing VAT fuel scale charge, which is based on the engine size and fuel type of a car, will be replaced by a fuel scale charge based solely on the CO2 rating of a car. The new table, which mirrors that used for direct tax purposes, will have 21 bands with 5g/km increments.
The complete new table, available following Budget 2007, will provide firms with the actual scale charge for a car within a particular band. Apart from the change to a CO2 basis, the system will operate in exactly the same way as the existing VAT fuel scale charge. http://www.hmrc.gov.uk/briefs/brief1307.htm
Employer CD-ROM and Microsoft Vista
The Pre-Budget Employer CD-ROM 2007 from HMRC will not auto install on the new Microsoft Vista operating system.
To install the CD-ROM, HMRC suggests the following steps:
"'Explore' the CD-ROM and select the file ECD_2007.exe (or ECD_2006.exe if trying to install the 2006 CD-ROM). You can 'explore' the disk either by selecting 'start', 'run' and typing the letter of your CD-ROM drive followed by a colon e.g. D: and hitting 'enter'; or select 'My computer', the CD-ROM drive and right click. You will then be given the choice of installing or running from disk. Select 'install'. When asked where you would like to install the CD do not accept the default installation folder, instead type C:HMRC and select 'next'. The CD-ROM will then install.
http://www.hmrc.gov.uk/employers/cdrom/install-vista.htm
Charities Receiving Gross Bank Interest
HMRC has updated its guidance for charities with reference to where they receive bank and building society interest without tax deductions at source http://www.hmrc.gov.uk/charities/tax/advantages.htm
PAYE Update: Online Filing
From 6 April 2008, employers with 50 or more employees must send their employee starting and leaving details including some pension information to HMRC online. And every employer regardless of how many employees they have will have to do the same from 2010. HMRC has updated its guidance on filing in-year information online.
From April 2007, HMRC is introducing an automatic process to change tax codes during the tax year for benefits in kind that employers report on form P11D and P46(Car).
Also from April 2007, HMRC will automatically bring together pay and tax information for an individual from forms P14 into a single total, irrespective of the number of jobs they have had during the year. There will be no change to National Insurance processing arrangements. http://www.hmrc.gov.uk/briefs/brief1507.htm
Tax Tip
The Treasury Solicitor's department has now published (as guidance note BVC 17 at www.bonavacantia.gov.uk) confirmation that they will not take a point on the technically unlawful return of capital where a limited company takes advantage of ESC C16, provided that the unlawful distribution (broadly, share capital, premium and non-distributable reserves) does not exceed 4,000.
Where the potentially unlawful distribution exceeds 4,000 there are a number of unattractive choices. One is to make an unlawful distribution and wait for the Treasury Solicitor to notice. Few advisers would want to condone that. Another is to leave an appropriate amount of value in the company when it is struck off. Few clients will welcome that. A third is to appoint a liquidator, with its attendant costs. A fourth, if you would rather pay a lawyer than a liquidator, is to seek a reduction in share capital by application to the court.
More attractive choices would normally be:- to repurchase most of the shares with a "permissible payment out of capital" (available only for private companies), which would normally be much cheaper than a liquidation (albeit that stamp duty will be payable)
- to re-register the company as an unlimited company and thereby permit lawful distribution of share capital, which may be the quickest and cheapest course provided there are no concerns about members becoming liable for any liabilities that later surface.
